Pros: An iTunes format movie and music player for high-definition televisions, capable of acquiring content on its own from the Internet or accessing a computer’s iTunes library. Supports playback of high-resolution (720p) rented or user-created videos, as well as streamed or synchronized YouTube, music, photo, and podcast content, using a relatively straightforward interface and 802.11b/g/n wireless networking gear. Runs quiet, consumes little space, and includes Apple Remote; works with iTunes software to let you move certain purchased content back and forth from the device. Now functions as an AirTunes client to stream audio content wirelessly from an iTunes-equipped computer, even simultaneously with other AirTunes devices. Available in 40GB or 160GB versions, more reasonably priced than prior models.

Cons: You’ll have to create, convert, or buy compatible content, based on Apple-limited video format support; YouTube, iPod-formatted, and previously purchased iTunes Store videos can look downright bad on larger HDTVs. Does not include video or audio cables of any sort, and may not be compatible with certain TVs that it can physically connect to. Wireless hard disk synchronization can take a very long time to fill over standard wireless connection, such that 802.11n is strongly recommended. Doesn’t connect wirelessly to other Apple TVs or network storage devices, and integrated USB port does not allow connection of useful accessories such as a keyboard or additional storage. Music playback and photo features are acceptable but not mindblowing; could still benefit from simple tweaks. Small glitches and omissions in certain Store, video and audio features detract from overall experience.

Though many readers will be inclined to skip over it, the Settings menu has received a pretty major overhaul. Apple now combines Apple TV 1.0 and 1.1’s big Settings and Sources features into a Settings heading with six options: General, Screen Saver, Audio, Video, Computers, and Downloads. Then, it disperses some of Sources’ features into other areas of the interface.

General includes most of the options found in the prior menu system, including network and iTunes Store settings, plus dramatically expanded Parental Controls.

You can now sign in and out of your iTunes Store account from the Apple TV, which simultaneously lets you use the device to make purchases without using a computer, and synchronize purchased content back to your computer when you want to back it up.

Apple TV’s new Parental Controls now encompass much more than just a YouTube on and off feature—parents can now independently disable viewing of Internet-downloaded photos, YouTube, Podcasts, and the Purchase/Rental features, as well as restrict movies, TV shows, music and podcasts based on their explicit content or ratings.

As before, the Controls are locked and unlocked with a four-digit passcode. Sixteen languages are also available for the Apple TV’s interface.

At first glance, it appears that the screensaver hasn’t changed much—the Apple logo screensaver has disappeared from the list. But there’s a surprise: select Photos or Slideshow and you’ll be able to choose from Apple’s built-in photos, a Flickr album, a .Mac album, or synchronized photos. Photos presents a cascade of falling images, Slideshow the same sort of slideshow you’d see when displaying any content from Apple TV’s full-fledged Photos menu. Obviously, pictures don’t need to be synchronized from iTunes to your Apple TV for this feature to work—virtually anything on Flickr or in a .Mac gallery can become your screensaver.

A new Audio Settings menu includes the Repeat Music, Sound Check, and Sound Effects features of past Apple TV software, but now adds Dolby Digital Out as an option for 5.1-channel optical audio output in properly encoded videos. An AirTunes feature also lets you play back streamed iTunes audio through the Apple TV with attached speakers, akin to an AirPort Express. In a new twist, iTunes now shoots over the song plus its album art, which displays on your TV screen while the song is playing. We found that the feature worked unpredictably; the music always played back, but the album art didn’t always show up automatically on our TV. Going into the My Music > Now Playing menu fixed this, though—the correct album art was always visible there.

We also heard some weeks ago that this feature would include an unusual new benefit: it’s supposed to let you use the Apple Remote’s playback and track controls to control what’s coming over from iTunes, and we’ve heard reader reports that it works. This sort of control isn’t possible with the AirPort Express because it lacks a remote control, and since iTunes can stream music to multiple wireless devices at once, Apple TV adds a new twist—the ability to control everything from a TV. Sort of, at least: we initially* couldn’t get the remote control feature to work on either of our in-house Apple TVs.

Updated February 15, 2008: Following a reader tip, it turns out that Apple for some reason disables this AirTunes remote control feature by default, requiring you to go to iTunes Preferences, under Advanced, then General, then “Allow iTunes control from remote speakers.” Once you select it and hit OK, you can control AirTunes playback with your Apple TV and Apple Remote. The feature is initially a little on the slow side, but becomes more responsive and does work.

Back on the Apple TV, a Video Settings menu now permits you to access Closed Captioning on properly encoded videos, as well as switch the TV Resolution—even up to 1080p—and change the HDMI Output automatically, or manually to RGB or YCbCr color modes, and also adjust HDMI RGB brightness.

The 1080p option only appears on TVs that Apple TV identifies as 1080p-ready, and in our testing, it sometimes screwed up when making that identification, and worked only when we forced it to re-check by turning off the TV or unplugging the HDMI cable.

More significant was the fact that 1080p video looked no better than 720p—in fact, text and menus looked a little softer rather than appearing sharper and more detailed. Videos didn’t improve, either, a sign that Apple TV is really capped at a resolution lower than 1080p, and offers the option only for people who want to try it; we found that our 1080p sets were flakier in synchronizing with Apple TV when this option was turned on.

In one unusual experience, the Apple TV insisted that it wasn’t able to play back a rented HD video because our TV wasn’t HDCP (high definition copy protection) compliant, even though the TV was, and the video had been playing back on it only hours earlier. Again, we think faulty handshaking between Apple TV and the HDTV is to blame.

Sources has been renamed, interestingly, to Computers, enabling you to synchronize to and from one machine, as well as to stream from one or more iTunes libraries. The big surprise is that the new name seems to exclude Time Capsules or other wireless storage devices as sources for Apple TV. Another surprise: two Apple TVs in the same house don’t appear to see each other as sources for sharing downloaded videos and music. Both of these surprises are unwelcome. But in a final, positive surprise, Apple has changed the way that the prior Sources menu worked.

Previously, when you selected a source other than your Apple TV, you were placed in a series of menus to browse its local contents, and had to switch out of them when you wanted to go back to your Apple TV. Now, you pick a source, and its own libraries get integrated as contextual options in your main menu: Shared Movies, TV Shows, Music, Podcasts, and Photos options appear beneath the others as long as the sharing connection remains intact. This simplifies your access to another library—another improvement on the past Apple TV interface, made possible by the two-pane interface.

Finally, there’s the Downloads option. This lets you know if Apple TV has downloads in progress, and lets you check to see if any downloads from iTunes may be awaiting initiation. Though current music downloads generally proceed in the order they were purchased, video downloads are given higher priority, such that an album download will interrupt after completing a song to let a more recently purchased video transfer first. You can also pause any download in progress, which will cause another download to start instead.

In summary, though the Apple TV 2.0 settings menus appear familiar, they hide a few major improvements in screensaver functionality, sharing with iTunes and AirTunes, and parental controls, as well as a couple of disappointments that we’d attribute more to bugs than bigger flaws in the device. Again, additional polish would help make Apple TV 2.1’s highest-resolution video output and wireless AirTunes control functionality more intuitive, impressive and reliable.

Editors' Note: iLounge only reviews products in "final" form, but many companies now change their offerings - sometimes several times - after our reviews have been published.
This iLounge article provides more information on this practice, known as revving.